Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

December 2013

12/31/2013

This non-vintage Champagne was a delightful accompaniment to our New Year's Eve dinner of steamed Maine lobster and a tossed salad. The lobsters were sweet and succulent (and easy to pry out of the shell), almost as though they were soft shell (but it's wrong season and wrong coast for soft shellers). The champagne was medium bodied, with bright acidity and a ton of scrubbing bubbles to refresh the palate. Good citrus, apple, and pear notes. Toast, of course. Yum.

Wachtell thinks it knows exactly why Icahn is engaged in what it regards as naked chicanery: to bully his anti-takeover nemeses at the law firm. “The Icahn-sponsored CVR litigation amounts to a scare tactic to intimidate those lawyers willing and able to help clients faced with Icahn’s opportunistic attacks,” Wachtell said in its New York case, which seeks a declaratory judgment that Wachtell committed no malpractice and that Icahn and CVR breached confidentiality orders protecting discovery from the banks’ fee litigation. “In a number of high-profile situations, Wachtell Lipton has helped clients fend off Icahn, including assisting Clorox in defeating an Icahn takeover assault in 2012 and assisting Dell when Icahn unsuccessfully sought to break up a premium transaction in order to buy the company for himself in 2013,” the firm asserted. “Icahn resents any resistance and thus has for years attacked Wachtell Lipton in the press for its fierce commitment to its clients. With his new litigation campaign, Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability.”

“Federal investigators are looking into allegations that CalPERS violated insider trading laws this year when it purchased $26.6 million in restricted stock and then decided it didn’t need to reverse the trades when they were discovered.”

Readers may recall that in 2005, the Securities and Exchange Commission issued a Section 21(a) report with respect to the The Retirement Systems of Alabama (RSA). At the time, RSA had no policies prohibiting insider trading. Notably, RSA had entered into a written non-disclosure agreement with the issuer that specifically prohibited trading in reliance on material, non-public information.

CalPERS issued a response that essentially denied the existence of any material, non-public information

Davidoff thinks that "as long as the arrangement is disclosed and the hedge funds don’t exert any future control over the nominees, it is unlikely that this violates any state or federal law." Clearly, as discussed below, such third party payments create a serious conflict of interest for the directors in question. Maybe you can argue that the shareholder vote electing them to the board cures that conflict (at least if the directors in question receive the affirmative vote of a majority of the disinterested shares,as to which see Portnoy v. Cryo-Cell Intern., Inc. 940 A.2d 43 (Del.Ch.2008) (holding that, under Delaware's corporate election law, ratification has to be accomplished by a vote of the disinterested shares; that is, even if one assumes that the election of the nominee on the management slate by the electorate is a ratification of that nominee's placement on that slate by way of the agreement under challenge, the nominee would have to win a majority of the shares not subject to the agreement)).

But I'm not convinced a generic vote to elect directors ratifies this sort of conflict of interest. Delaware law on conflicted interest transactions, after all, talks about disinterested shareholder approval of "a transaction," which I would understand to mean a specific vote on the specific conflicted transaction. Cf. Restatement (Third) of Agency sec. 8.06, which provides in pertinent part that "the principal's consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship." To be sure, directors are not agents, but their fiduciary duties are quite similar.

Finally, given that:

Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty .... The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. [Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. Ch. 1939)]

It seems to me that the burden ought to be on proponents of such arrangements to come up with a clear and convincing explanaton of why they're legal.

Even if these arrangements are legally valid, I thinkthey are a terrible idea. Davidoff notes two common arguments made against them:

The first is that the hedge fund directors are not independent. Because the directors are being paid by the hedge fund, they will be loyal to the hedge fund, rather than the company.

The second is that by paying these directors large sums over three years, the hedge fund nominees will aim for short-term performance and not care what happens to the company in the longer term.

They both strike me as eminently sensible. In addition, as he also notes:

There is no doubt that this kind of pay arrangement sets up two classes of directors doing the same job but being paid very different amounts. It could not only create resentment, but disagreement over the path of the company. And it also has the potential to begin a second arms race in director compensation, something probably best avoided.

Well, 2013 goes into the books as a much better year than the annus horribilis, but that's more of a comment on how bad my 2012 season was rather than how good this year was. One second place, two 4th places, a 7th, and a 10th:

12/29/2013

Eliot Spitzer lusted after violence, a former hooker says in a new tell-all book — revealing in graphic detail how the love gov pinned her to a bed inside a posh, Murray Hill apartment and then gripped her by the neck until she feared for her safety.

The violence was scripted by Spitzer, who wanted his hooker to follow a role-play dialogue in which she would pretend she had just taken a self-defense class.

The kinky politician would then pretend to test her skills by announcing, “Well, then, let’s see if you learned anything,” and attacking her.

12/27/2013

Well, it was not a H2H season for the ages. In the PB.com H2H league, my Unseen Academicals finished 10th out of 12. In the PB.com Last Minute H2H league, Scalzi's Redshirts finished in 7th place out of 10. In Tabb's H2H league, Cowboys Drool finished in 4th place.

My best hope remains the roto leagues. Bainbridge's Bruins have a reasonably solid hold on 1st place in Tabb's roto league. In the PB.com roto league, Da Commish is in 4th place, 11 points behind 3rd, 33 points behind 2d, and 54 ahead of 5th. So I've got a decent shot at a top 3 finish amd a virtual lock on no worse than 4th.

I have never understood the allure of gold as an investment. Some people say it's a hedge against societal collapse, but that's BS as we learn from The Atlantic:

Since November, financial advisor David Marotta has been publishing aseriesof blog posts on how to manage your money in the event of a financial apocalypse—as in a world of hyperinflation, governmental collapse, and anarachic mobs. You know, the standard stuff of a doomsday prepper's fever dreams. While Marotta admits he has some fears about the direction of the country (the man's not an Obamacare fan, to say the least) most of it seems to be fairly tongue-in-cheek material aimed at talking potential clients down from investing in some of the crazy, survivalist scams advertised on conservative talk radio. (Sadly, TheWashington Examiner seems to have missed the humor).

And the first scam on his agenda? Plowing all your money into gold, of course. Here's his biblically inflected explanation of why toting around a suitcase of gold come the end times—and at today's prices, a $1 million in gold coins would fit in a suitcase—would be a suboptimal strategy:

If there really is a collapse of the money supply it is difficult to believe that your briefcase of pretty coins will still have any purchasing power near $1 million. In the 1970s, Christian singer Larry Norman made popular the Apocalyptic song lyric, “A piece of bread could buy a bag of gold” based on Revelation 6:6. In The End, I’d rather not have bought as much gold as possible.

In other words, when an economy goes full-on Mad Max and we're all reduced to bartering, the survivors are going to be more interested in useful goods than in a soft metal useful mostly for ornamental purposes. Part of gold's value as a commodity is derived from the fact that it can easily be traded across borders. But if that were no longer an option, and you were reduced to using bullion to buy a baguette, it wouldn't really matter what people in China or India were willing to pay for your gold.

I would also add that, in a truly Hobbesian state of nature, it might not be wise to keep all your wealth stored in a small, easily pilfered box. ...

His bottom line? Keep the shiny stuff to less than 3 percent of your portfolio. And, if you're really convinced the end is nigh, I say stick with canned goods.

In making a rational decision about whether to invest in gold, two possible outcome scenarios must be considered:

Society does not collapse

Society does collapse

Gold can only be a winning investment under the second scenario. If society does not collapse-if we continue to muddle through, as we more or less have in the United States for several centuries now-then gold is a losing investment. To see why, we have to explore what it means to be a "store of value."

I'm going to skip his explanation of why gold makes a lousy store of value. Instead, I want to go on to the survivalist argument for gold:

Please run the following movie in your head: society has just collapsed and you, whistling cheerfully, tossing your gold coins in hand, stroll down to the store, shouldering ahead of those wretches with their wheelbarrows of worthless paper currency, to buy a loaf of bread …

What's wrong with this picture? Two things: either you will be beaten bloody, and your gold robbed, before you ever get to the store; or, you will be followed home and murdered in your sleep-and your gold robbed.

First moral: if you are going to buy gold, you have to buy a shotgun too. Under precisely those conditions where gold will finally pay for itself, it will be far too dangerous for an unarmed person to carry gold. If you truly believe that you need to own gold, then it follows directly that you need to own a shotgun too. Bars on the windows and a Doberman wouldn't hurt either. ...

Second moral: under precisely those circumstances where gold would pay off as an investment, you can't possibly trust anyone else to hold your gold for you. And if you are thinking that you will keep your gold in a repository just until things start to look grim…have you ever seen pictures of a run on a bank…it isn't very pretty. Besides, how are you going to get that gold home, without a shotgun-do you really think the repository employees are going to keep mum about this guy in the red Camry, now heading West on Main Street, with thousands of dollars of gold in the trunk? ...

If you are going to buy gold, you must think and act like a survivalist.

And even in good times, gold makes no sense as a monetary standard, as we learn from Terry Pratchett. In Pratchett's wonderful Discworld novel Making Money, Lord Vetinari maneuvers reformed criminal and current Ankh-Morpork Postmaster General Moist von Lipwig into taking on the job of running the Bank of Ankh-Morpock and the Royal Mint. Lipwig eventually discovers that the 10 tons of gold supposedly in the bank's vaults is now longer there. Panic almost ensues. Naturally, however, Lipwig saves the day, gets the girl, and persuades the citizens of Ankh-Morpock to abandon the gold standard.

In doing so, Lipwig is interviewed by The Ankh-Morpork Times' crack reporter Sacharissa Cripslock, in the course of which Lipwig comes up with what I have always regarded as a compelling argument against the gold standard:

"The world is full of things worth more than gold. But we dig the damn stuff up and then bury it in a different hole. Where's the sense in that? What are we, magpies? Is it all about the gleam? Good heavens, potatoes are worth more than gold!"

"Surely not!," [said Ms. Cripslock]

"If you were shipwrecked on a desert island, what would you prefer, a bag of potatoes or a bag of gold?," [replied Moist]

"Yes, but a desert island isn't Ankh-Morpork!"

"And that proves gold is only valuable because we agree it is, right? It's just a dream. But a potato is always worth a potato, anywhere. A knob of butter and a pinch of salt and you've got a meal, anywhere . Bury gold in the ground and you'll be worrying about thieves for ever. Bury a potato and in due season you could be looking at a dividend of a thousand per cent."

"Can I assume for a moment that you don't intend to put us on the potato standard?" said Sacharissa sharply.

12/25/2013

Contrary to the Citizens United validation of a firm’s speech rights, and disregarding the possibility that government speech/press regulation could conceivably facilitate the outright regulation of the press, the NLRB recent opinion in Ampersand shrinks a newspaper’s First Amendment rights. Although it is possible that press activity plays an important role in public affairs as an antidote to government overreach and abuses of power, the NLRB deploys its power in a way that may threaten the free press. The NLRB’s decision in Ampersand fits conveniently, accidentally, or consciously within an arrangement illuminated by the dissent in Citizens United. This arrangement implies that when rights-bearing individuals pool their economic and ideological resources to form a firm that enters into commerce, their constitutional rights do not necessarily remain intact for a variety of public welfare reasons. Whether the latter claim is correct or not, the NLRB’s Ampersand opinion materializes as part of a wide-ranging labor movement effort to resuscitate unionization, premised on the thesis that workers’ yearning for an effective voice in the governance of their workplace has not waned in the face of union decline.

Opposing the NLRB’s decision-making in Ampersand, this Article defends Ampersand as a “person” within the meaning of the Constitution; a “person” that is, and ought to be entitled to control the editorial content of its newspaper despite the counterclaims of reporters seeking to organize within the meaning of the NLRA. Lastly, this Article concedes that any defense of speech/press rights for employers must contend with the persistent efforts of labor advocates to diminish what the Constitution appears to protect. This maneuver suggests that speech/press rights are likely to remain contingently unstable in our postmodern world, which teeters between freedom and government coercion.

Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate. The statutes are simply too broad, and I think courts would want more evidence regarding the corporation's stance on the issue. Obviously, people would disagree on whether a "socially focused" corporation would oppose certain types of contraceptives. And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity's argument could be strengthened. ...

I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.

Christmas Dinner was Alton Brown's Roast Duck (salty but yummy), with Emeril Lagasse's Wild Rice and Cornbread Dressing, Tawny Port Gravy, and roasted carrots. Somehow this menu said Red Burgundy and the Drouhin was a great answer. Medium bodied ruby color. Strong bouquet. Cherries, cola, and raspberry. Long finish. Two bottles left in the cellar and I think they will need drinking over the next year or two at the outside. It's at peak and not going to get better. Grade: A-

12/24/2013

As noted when last reviewed in 10/2012, I had targeted this wine for drinking in late 2013. So I popped it tonight to serve with veal osso buco (using the recipe from Williams-Sonoma Essentials of Slow Cooking cookbook). As expected, the wine was at peak or just past it. The bouquet was redolent of tobacco, earth, fall leaves, dried herbs, and red fruit. On the palate, it suggested blackberries, black cherries, prunes, and cedar. This bottle was slightly better than the last one. Grade: A-/A

In this hour-long radio drama, Santa struggles with the increasing demands of providing gifts for millions of spoiled, ungrateful brats across the world, until a single elf, in the engineering department of his workshop, convinces Santa to go on strike. The special ends with the entropic collapse of the civilization of takers and the spectacle of children trudging across the bitterly cold, dark tundra to offer Santa cash for his services, acknowledging at last that his genius makes the gifts — and therefore Christmas — possible. Prior to broadcast, Mutual Broadcast System executives raised objections to the radio play, noting that 56 minutes of the hour-long broadcast went to a philosophical manifesto by the elf and of the four remaining minutes, three went to a love scene between Santa and the cold, practical Mrs. Claus that was rendered into radio through the use of grunts and the shattering of several dozen whiskey tumblers. In later letters, Rand sneeringly described these executives as “anti-life.”